Microsoft fails to notice the death of the PC, posts record revenue figures instead

The Windows Division once more becomes the company's biggest money-maker.

Microsoft is reporting record revenue for the second quarter of its 2013 financial year. Performances were strong all around, with the Windows Division up 24 percent year on year.

Revenue was $21.456 billion, up three percent on the same quarter a year ago. Operating income was $7.771 billion, down three percent. Earnings per share also fell by three percent, at $0.76.

As is the norm for Microsoft financials at around the time of major product launches, there are substantial revenue deferrals in play that rejig the numbers a little. Both Windows 8 (launched last quarter) and Office 2013 (expected in coming weeks) went on sale before they were released. For example, anyone buying a PC with Windows 7 preinstalled in the final few months before Windows 8's release now qualifies for a Windows 8 license at no extra cost. A similar scheme is running for Office 2010 in the run-up to Office 2013's launch.

Microsoft's GAAP results defer revenue in the quarter that the sale is made until the product has been delivered. However, the company also releases non-GAAP numbers that recognize the deferred revenue immediately, so reflecting the money that the company has actually received. The GAAP results thus include some revenue that was taken during the last two quarters of Windows sales and held back, and exclude revenue for Windows 8 and Office 2013 licenses that still haven't shipped.

In these numbers, the company's revenue was $22.002 billion, up five percent from a year ago, its operating income was $8.317 billion, up four percent, and its EPS was $0.81, also up four percent.

The top performer was the Windows Division, reporting under its new name for the first time. Previously it was called "Windows and Windows Live Division." The new name reflects the termination of the "Windows Live" branding; it's also the division that houses Microsoft's Surface tablets. Revenue for the division was $5.881 billion, up 24 percent on a year ago; operating income was up 14 percent at $3.296 billion. However, there are some deferrals. $161 million of revenue last quarter was generated by Windows Upgrade Office sales and is now being deferred. $786 million was recognized, after having been previously deferred. Adjusting for the net revenue deferred gives a non-GAAP revenue of $5.259 billion, up 11 percent on a year ago.

Either way, this is a strong performance. Even with deferrals, revenue grew, outperforming the x86 market as a whole. The company didn't give any specific information about the sales performance of its Surface tablets and of Windows 8, saying only that "more than 60 million" licenses have been sold. It did, however, say non-OEM revenue (which includes Surface, retail upgrades, and volume licensing) grew by 40 percent. Some of this may have been stimulated by companies rushing to get volume licenses purchased prior to a new pricing scheme which Microsoft brought in at the end of last year.

Server and Tools division was up nine percent year on year, with revenue of $5.186 billion. Operating income was also up nine percent, at $2.121 billion. Microsoft showcased System Center revenue, up 18 percent, and SQL Server revenue, up 16 percent, as particular highlights. The division's revenue is still split 80:20 between products and services, with services a solid billion dollar a quarter operation.

Microsoft Business Division also had significant deferrals relating to Office 2013. Revenue was $5.691 billion, down 10 percent on a year ago, with operating income of $3.565 billion, down nine percent. However, there was considerable (deferred) Office Upgrade Offer and Office 2013 pre-sales revenue, amounting to $788 million. Include this and the revenue figure is $6,479 million, up three percent. There was some evidence here of the weaker PC market. Although software assurance revenue was up 10 percent, consumer/retail revenue was down two percent. Exchange, SharePoint, and Lync collectively grew double digits, with Lync alone growing by 35 percent.

Online Services Division is continuing its slow trudge towards profitability. Revenue was up 11 percent at $869 million, and losses were down 38 percent to $283 million. If the group can keep improving at this rate, it should attain profitability in the next couple of years.

The only division to show a worsening of its performance was the Entertainment and Devices Division. Unusually, this division also had revenue deferrals going on. Overall revenue was down 11 percent at $3.772 billion, although operating income rose 15 percent to $596 million. An additional $380 million for "Video Game Deferral" is being deferred, representing Halo 4 revenue. With that included, the division's revenue was down two percent, at $4,152. Unsurprisingly, in spite of it being the Christmas season, Xbox 360 sales were down year-on-year. Microsoft sold 5.9 million of them, 28 percent fewer than it sold 12 months ago, resulting in $1.1 billion less in Xbox 360 platform revenue. (This was only partially offset by increased Xbox Live revenue.) Windows Phone sales were up four times higher than some undisclosed number, Skype minutes were up 59 percent to 138 billion, and there are still over 40 million Xbox Live members.

Next quarter, Microsoft expects to recognize the remaining $1.1 billion related to Windows Upgrade Offer deferrals. The company also predicts growth across tablets, laptops, Ultrabooks, and all-in-ones thanks to Windows 8 and Windows RT.

Server and Tools product revenue should grow in the low teens and enterprise services revenue in the mid teens. Microsoft Business Division multi-year revenue is expected to grow by the low double digits, and transactional revenue is expected to outperform the x86 PC market. Growth in the high teens is also expected for Entertainment and Devices. The deferred revenue is expected to be recognized as the final parts of Halo 4 are delivered.

So Windows Division is back on top as Microsoft's top money-maker. As dependent as it is on the health of the PC market, it appears—so far—to be performing well. But the company is remaining tight-lipped about specifics. We still don't know how many Surfaces and Windows Phones have been sold. Until and unless the company has a truly bumper quarter and wants to boast about the numbers of both, we probably won't ever know.

157 Reader Comments

There's more to Microsoft than Windows but I'll focus on Windows8 here.

Far too many people are chanting the death of the PC. Your parents PC may be obsolete but the platform is very much alive and evolving. It will continue evolving till somebody figures how to bring the PC levels of productivity to tablets and phones. Also, when battery life is long enough for them to be depended on. Mobility is a complement, not a replacement for the PC ecosystem.

Windows8 fell in the unenviable bottom of the 20 year old sentiment that cycles from excitement to disappointment.

In spite of all the doom and gloom W8 is the best operating system Microsoft has ever produced (almost a million PCs are sold every day, popular sentiment be damned).

It appears that this will be a repeat of the Vista debacle whose shortcomings were corrected by Windows7. W7 is so Vista that Microsoft didn’t even bump the internal version sequence. In fact, W7 is such an incredibly good product that it will make it very difficult for successive releases of Windows to establish and lay claim of their own niches.

W9 will most likely correct the issues that infuriated many W8 users. WindowsRT (the new OS glued with Windows8) breaks off from the venerable Win32 API. It fused DirectX with the kernel. A gigantic bet that will take a few years to pay off as it broke backwards compatibility. Steven Sinofsky pushed RT very aggressively and judging from the commentaries in the blogosphere a large percentage of users have pushed back.

Sinofsky is out and W9 will probably have an option allowing users to retain the classic user interface and hide the Metro tiles. Maybe there will be a service pack with that option.

Anyhow, essentially a decent quarter for Microsoft. FY12 ending in June will probably be decent too. Looking forward to a much better FY13 and FY14 with W9.

There are a couple of things perhaps worth noting here:1) The 11% y/y growth in Windows division is a decent number, but it falls very far short of the 70% y/y growth in that division that accompanied the Win7 launch.2) A decrease in YoY profit during a Windows launch quarter is discouraging. I suspect that has never happened before (though not sure about the Vista launch)3) Losses attributed to 'Corporate level activity' grew by a staggering $442M YoY, and this explains why overall profits were down even though almost all the division numbers improved significantly. Any ideas what this is due to? Marketing for Win8 and Surface?4) Perhaps the biggest positive note here is the huge decrease in losses Online Services division. If this represents a real trend and not just an accounting gimmick (see 3), then this is major progress toward breakeven in Online, which is potentially huge news for MS's long term growth prospects.

So according to the markets you should pay a P/E of 10 for Apple's unacceptable profit growth of around 8% year over year (when you adjust for Apple's Q1 being a week shorter this year). Meanwhile, you should pay 15:1 for Microsoft whose profits are actually shrinking 3% year over year. Of course Apple has Samsung threatening its cash cow, whereas Microsoft's Office/Windows cash cow is completely safe aside from a few minor threats such as tablets, phones, the internet, Google, Apple, etc.

W9 will most likely correct the issues that infuriated many W8 users. WindowsRT (the new OS glued with Windows8) breaks off from the venerable Win32 API. It fused DirectX with the kernel. A gigantic bet that will take a few years to pay off as it broke backwards compatibility. Steven Sinofsky pushed RT very aggressively and judging from the commentaries in the blogosphere a large percentage of users have pushed back.

Sinofsky is out and W9 will probably have an option allowing users to retain the classic user interface and hide the Metro tiles. Maybe there will be a service pack with that option.

Anyhow, essentially a decent quarter for Microsoft. FY12 ending in June will probably be decent too. Looking forward to a much better FY13 and FY14 with W9.

Sinofsky is not the one who made the design decision about removing the start menu. The new Windows division head is the one who made that decision. Its not coming back. And based on Win8 sales so far, no one aside from the usual luddites and angry geeks gives a damn.

I am somewhat surprised at the numbers given my personal dislike if windows 8. However, even if Microsoft had flopped on it, it still wouldn't have been the death of the PC. Anyone who thinks it would sound the death of the PC doesn't have a clue how to REALLY use their PC. Im glad Microsoft is doing well here. Like the previous poster mentioned, Win9 will probably fix the issues in win8.

Personally, i installed win 8 on one of my PCs, used a third party app to disable metro and restore the start menu. I refer to it as my Win7 SP2 machine.

Oh, and as far as the popularity of Windows 8, the masses seem to love it. Most who lurk here may have a dissatisfaction with it, but my little sister, mother, and girlfriend seem to love it. I think them loving it is far more important to sales than the tech savvy loving it.

The press keeps on about the death of the PC, but there is no valid replacement for content creation, gaming (excluding the casual game market), software development and most office work.

Sure, laptops can be used in most situations where a desktop PC is used. But if you want to run any intensive application, the laptop is going to heat up and they don't have the graphics power to get the most out of the latest triple-A games.

The problem is that the market is currently saturated, with people replacing PCs infrequently and the people who don't need a PC to do what they need replacing them with mobile devices instead.

That isn't to say that the PC market is dead, it's just not as big as it was.

Also, there are a lot of gamers and enthusiasts that build their own PCs. Are they included in the PC sales, or is it just the pre-built PCs that are counted?

Oh, and as far as the popularity of Windows 8, the masses seem to love it. Most who lurk here may have a dissatisfaction with it, but my little sister, mother, and girlfriend seem to love it. I think them loving it is far more important to sales than the tech savvy loving it.

The funny thing for me was I was nervous about putting it in front of the less tech savvy friends and family in my circle. But so far everyone I have installed it for has absolutely loved it. Like, way more than I do.

Its been a huge reminder that power users really do not have a good concept of what is useful and fun to use. Hell, most of us dissed the iPhone and iPad for reasons like walled gardens and 'too simple' interfaces. We were wrong then. Those still holding on to those ideas when talking about Win8 are wrong now.

The press keeps on about the death of the PC, but there is no valid replacement for content creation, gaming (excluding the casual game market), software development and most office work.

Sure, laptops can be used in most situations where a desktop PC is used. But if you want to run any intensive application, the laptop is going to heat up and they don't have the graphics power to get the most out of the latest triple-A games.

The problem is that the market is currently saturated, with people replacing PCs infrequently and the people who don't need a PC to do what they need replacing them with mobile devices instead.

That isn't to say that the PC market is dead, it's just not as big as it was.

Also, there are a lot of gamers and enthusiasts that build their own PCs. Are they included in the PC sales, or is it just the pre-built PCs that are counted?

I just wanted to point out that a laptop IS a personal computer. I'd also think a smartphone is a personal computer, albeit underpowered, since they are usually quite personal and they do compute.

If we have a leap in battery technology, smartphones would be able to make quite a leap in terms of raw power. Or, we could increase the power of smartphones sans new battery technology, perhaps by simply dictating the processing power available based on whether it is plugged into a dock or running on the battery.

Zerias, the idea that everyone with a different opinion must be getting paid to express them by some vested interest, rather than simply having a different view of things, is extremely tedious and adds nothing to the discussion. If you have evidence that someone is being paid to offer an opinion rather than genuinely holding it then please present it, if you have no evidence then casting such aspersions is pretty rude. You're essentially accusing Peter of fraud and corruption based on him disagreeing with you.

I agree with several posters here that a lot of consumers, used to smart phones and tablets, will like Windows 8 while the "tech savvy" will know how to install classic shell, boot to the desktop, disable annoying swipes and change their default programmes to proper desktop ones and so be able to ignore the metro stuff altogether while enjoying the marginal, but real, increases in Window 8's general performance.

Author, non-GAAP is wires and mirrors. To defend a company with non-GAAP issues is laughable. Microsoft's future is truly in question. Too much of Microsoft is stuck in the last century. Apple and Google are nimble. Microsoft is not.

It's hardly smoke and mirrors (which I assume is what you meant?).

Booking the revenue before the product is delivered is unwise. There could have been some late-breaking issue with Windows 8, Office 2013, or Halo 4 that forced Microsoft to delay the product and issue refunds. Or Microsoft could have gone bankrupt; the people sold these deferred copies would all be creditors. Microsoft's deferral accounting accommodates this. The company takes a hit in the run up to a new launch (keeping some revenue segregated because its corresponding product hasn't shipped) but then has a boost later on.

Treating this kind of income as deferred income is not unusual, and the question of how best to book revenue for software licenses that include this kind of liability is an open one.

In point of fact, Microsoft used not to break out unearned revenue (that is to say, revenue where the money had been received but the product hadn't yet been delivered) in this way. The company started doing so in response to an SEC investigation between August 1999 and June 2002. The SEC was concerned that Microsoft was manipulating its figures to smooth its earnings results. The decision to break out the unearned revenue for upgrades (and hence produce more "uneven" quarterly numbers) was an effort to appear more transparent and assuage the concerns of investors and regulators alike.

People who keep saying PCs are dead are clueless how the world runs. PCs are essential to businesses and are not replaceable in most cases. OS X, Linux, or smartphones, it doesn't matter. They cannot replace the productivity you get with the current PCs. Businesses don't f*ck around with the productivity like some consumers choose to do so by playing around with alternative OSes.

All those Apple and Android mobile gadgets are nice additions at the moment but eventually they will all likely be replaced by Windows mobile devices. Why? Because it will be easier to change mobile OS to match desktop OS than the other way around. And yes, they will converge. W8 and WP8 are just a start and it will be more obvious going forward. Mark my words!

Are you serious? The article is about Microsoft's revenue increasing despite media claims that the PC is dead. If the PC were dying, Microsoft's PC-related revenue should be decreasing. If Microsoft's revenue is increasing and it's profits are decreasing, that is an entirely different matter.

Oh, and as far as the popularity of Windows 8, the masses seem to love it. Most who lurk here may have a dissatisfaction with it, but my little sister, mother, and girlfriend seem to love it. I think them loving it is far more important to sales than the tech savvy loving it.

Seems to be the way here too. My son (Uni IT student and tech geek) just shocked me by purchasing an Ultrabook PC and then upgrading it to Windows 8. Seems his Android Transformer and smart phone just didn't cut it for work efficiency. My daughter(Science student) is looking to replace her laptop PC with an Ultrabook too, that's to go with her Android tablet & smart phone plus Ipod touch. Repeat similar for wife and youngest daughter.

People who keep saying PCs are dead are clueless how the world runs. PCs are essential to businesses and are not replaceable in most cases. OS X, Linux, or smartphones, it doesn't matter. They cannot replace the productivity you get with the current PCs. Businesses don't f*ck around with the productivity like some consumers choose to do so by playing around with alternative OSes.

All those Apple and Android mobile gadgets are nice additions at the moment but eventually they will all likely be replaced by Windows mobile devices. Why? Because it will be easier to change mobile OS to match desktop OS than the other way around. And yes, they will converge. W8 and WP8 are just a start and it will be more obvious going forward. Mark my words!

Consider yourself marked, but the important thing is that there's data freedom were whatever a computer owner (on any platform) creates can be used on any other platform.

In fact, W7 is such an incredibly good product that it will make it very difficult for successive releases of Windows to establish and lay claim of their own niches.

And that's the killer shot. If a machine can run XP it can also run Windows 7 better. We have already reached the threshold of good enough for mainstream computing. Those spectacular days when a new (desktop) processor architecture meant a 50%+ performance increase as just long gone.

Oh, and as far as the popularity of Windows 8, the masses seem to love it. Most who lurk here may have a dissatisfaction with it, but my little sister, mother, and girlfriend seem to love it. I think them loving it is far more important to sales than the tech savvy loving it.

The funny thing for me was I was nervous about putting it in front of the less tech savvy friends and family in my circle. But so far everyone I have installed it for has absolutely loved it. Like, way more than I do.

Its been a huge reminder that power users really do not have a good concept of what is useful and fun to use. Hell, most of us dissed the iPhone and iPad for reasons like walled gardens and 'too simple' interfaces. We were wrong then. Those still holding on to those ideas when talking about Win8 are wrong now.

I'd like to add my perspective and two cents here. This really isn't a flame bait, but I sincerely think that power users would, at the very least, have no issues with Windows 8. There are two reasons for this:

First, anyone who substantially used anything but the search box in the start menu is not really as much of a power user as they think. Similarly, hard core power users typically use the keyboard over the mouse in the crushing majority of circumstances.

On the first count, the start screen really makes very little difference for me since pressing the Windows key and typing performs essentially in the same way—though I do miss the fact that Windows 7 did a universal search as opposed to the category-driven approach Windows 8 takes. A bonus, though, is the fact that every now and then a live tile catches my eye with something interesting, which is a nice perk if nothing else.

On the second count, Windows 8 has added a ton of new keyboard shortcuts that make me work that much faster around the machine than I could in Windows 7. The shortcuts aren't perfect—there are some annoying discrepancies between desktop-style and metro-style shortcuts—but take my word for it, they're quite a bit better. I'm a die-hard keyboard-shortcut junkie—I'm a developer and can't design to save my life, but learn Photoshop's keyboard shortcuts and you'll work simple tasks faster than the experts using a mouse.

So the point I'm trying to make is that, in my eyes, experience power users have, at the very least, nothing to hate about Windows 8. And from my and other people's experience, casual users seem to love it quite a bit. There is, though, the class in between the two that's having the hardest time with it. I just feel a tad annoyed to be lumped into the "power users hate Windows 8" when, in fact, as a true power user, even the additions to the surface—that is, not to mention the great performance improvements—are making my life easier.

Peter Bright has more IQ in his little finger than you have in half your head. And I mean this on a very personal note. I would say it straight to your face. And maybe give you a lot more than you bargained for, too. Get lost, troll.

Look Peter, I don't know what your issue is. I really don't know if Ars is paying you to try and spin Microsoft as something of a good thing... I don't know if you accept a side payment from Microsoft as an un-official spokesperson...

but let's be clear here. You spent a good amount of last year talking up Windows 8 like it was a good thing... and ultimately you were wrong.

You are still trying to somehow make Microsoft look like a good thing.

Please stop.

You are torquing those of us who are capable of understanding basic economics and business practices off. I'm a getting a little tired of having to correct you. Multiple times.

I have no idea where you get that from. Peter has been quite critical of Windows 8 in recent months, on some occasions I thought unfairly, but he certainly isn't fawning over it and is being quite direct. Nothing wrong with people being enthusiastic about a product before release either, regardless of result.

Booking the revenue before the product is delivered is unwise. There could have been some late-breaking issue with Windows 8, Office 2013, or Halo 4 that forced Microsoft to delay the product and issue refunds. Or Microsoft could have gone bankrupt; the people sold these deferred copies would all be creditors. Microsoft's deferral accounting accommodates this. The company takes a hit in the run up to a new launch (keeping some revenue segregated because its corresponding product hasn't shipped) but then has a boost later on.

Oh sure. If you have some way of knowing exactly what the income will be, say in a subscription or an amortized schedule of payments, it makes sense to defer that portion of income to the quarter in which it is actually due rather than account for it in one lump sum. After all, you may not actually get all the payments, so if you don't defer this income you might have to adjust your income statements after the fact to account for incomes not actually received. Analysts and accountants prefer to avoid revising earnings statements after the fact.

Quote:

Treating this kind of income as deferred income is not unusual, and the question of how best to book revenue for software licenses that include this kind of liability is an open one.

In point of fact, Microsoft used not to break out unearned revenue (that is to say, revenue where the money had been received but the product hadn't yet been delivered) in this way. The company started doing so in response to an SEC investigation between August 1999 and June 2002. The SEC was concerned that Microsoft was manipulating its figures to smooth its earnings results. The decision to break out the unearned revenue for upgrades (and hence produce more "uneven" quarterly numbers) was an effort to appear more transparent and assuage the concerns of investors and regulators alike.

You actually have this exactly reversed. It is not only unusual to defer the kinds of income MS was deferring, but the SEC made them stop. Which is why they no longer do it as part of their GAAP, and have to release non-GAAP statements to try and make earnings look not quite so bad. The following link is to an article that explains what the SEC made them stop doing, and why.

Essentially, if you can cherry-pick what and how much income in each quarter to defer to the next quarter. you can make declining profits look almost reasonable. All you have to do is defer enough income to cover losses you can see coming in the next quarter. That way you have a "rabbit" to pull out of the hat if things turn out to be as you estimated. After all, if you see a train wreck coming it's not hard to avoid it when you can just juggle the books to make it look more like a fender bender.

I suspect there was a mad rush to buy Windows 7 before it became unavailable.

Windows Licenses don't work that way. You can always downgrade for free. Buying Windows 8 now also gives you rights to Windows 7.

Only for Windows 8 Pro, regular Windows 8 does not include downgrade rights.

And it has to be the full version, not the upgrade version. I really don't care though, as 8 is working fine for me with classic shell installed. 3 machines in my house running 8 now that were not running 7 since upgrade to 7 was expensive and 8 was cheap.